Euro Area Inflation Pressures Balanced; Higher Long-end Yields a Concern

Group 1: Monetary Policy and Economic Conditions - Monetary accommodation is still influencing the euro area economy following rate cuts between June 2024 and June 2025 [1] - The recent US-EU trading agreement has alleviated pressure to lower rates, while the redirection of cheap goods due to higher US tariffs is expected to reduce prices in the short term [1] - The euro's appreciation against the dollar and other currencies is contributing to disinflation [1] Group 2: Inflation Dynamics - Inflationary pressures may increase in the medium term, with core and services-sector inflation and wage growth remaining above target despite being off their highs [2] - Tight labor markets and increased public spending in Germany and Europe are exerting inflationary pressure, alongside the new EU energy trading regime expected to raise prices [2] - Scope Ratings estimates inflation at 2.1% for this year and 1.9% in 2026, down from 2.4% last year and 5.4% in 2023 [2] Group 3: ECB Rate Outlook - The rating agency does not anticipate further ECB rate cuts this year, with a bias towards easing rather than tightening in the future [3] - The next change in the deposit rate, currently at 2%, will depend on inflation dynamics, US-EU trade relations, economic growth, and exchange rates [3] - The euro has strengthened by 13% against the dollar this year [3] Group 4: Currency and Competitiveness Concerns - A euro exchange rate significantly above 1.20 against the dollar could raise concerns about deflation risks and competitiveness [4] - The euro has gained from uncertainties surrounding US trade and fiscal policy, as well as a US strategy to devalue the dollar for trade rebalancing [4] Group 5: US Policy Impact - US rate cuts and market pressure for more Fed easing may increase pressure on the ECB if diverging rates sustain euro appreciation [5] - A stronger euro, if unchecked, could undermine inflation, potentially pushing it below target and prompting a response from the ECB [5] Group 6: Long-term Yields and Rate Expectations - Scope's baseline indicates higher rates for a longer duration, highlighted by the recent rise in long-term euro area yields, which is a concern for the central bank [7] - Further US rate reductions could de-anchor long-run inflation expectations, leading to increased long-term yields globally and steeper yield curves [7]